A Tale of Two (Comeback) Cities

PHOENIX-The downturn didn't hit too many cities harder than it did Phoenix and Orlando. In both metro areas, the residential sector bore the brunt—just as recovery in the housing market today is pulling up commercial property activity along with it, Phoenix and Orlando experts with NorthMarq Capital tell GlobeSt.com. A report from Florida Realtors last week showed that Orlando housing prices rose 23% year over year, a better showing than most markets across the state, while Phoenix has posted nearly two years' worth of consecutive monthly gains, according to the S&P/Case-Shiller Home Price Index.

For both cities, it's been a long climb back. “In the fall of 2007, you could just feel everything decelerate,” says James DuMars, SVP and managing director with NorthMarq's Phoenix office. He notes that the residential slowdown in Phoenix, which was first to feel the effects, coincided with the CMBS slowdown nationwide, which was then followed by the capital markets crisis, creating “a perfect storm.” This comedown from “a 20-year high” felt quite similar to the downturn of the late 1980s, “when we literally lost 100 financial institutions in Arizona.”

In the more recent downturn, DuMars recalls, clients who'd previously looked forward to the impending slowdown as a buying opportunity now were getting anxious over the state of the market. “I had one client tell me, 'I knew it was going to be bad. I never thought it would get this bad.' ”

Buoyed by a resurgence in housing prices—they're now up 60% from the recession-era trough, thanks in part to Arizona's lender-friendly foreclosure laws—“we've seen office buildings rise in price 20% to 25% over a six-month period, with no rent growth and no absorption,” says DuMars. “Now we're seeing new construction and job growth. There have been some really good things happening in Phoenix in the past 12 to 18 months.” For example, State Farm recently announced it would build a $600-million campus in suburban Tempe, relocating employees from all over the US to the new site.

DuMars has seen this movie before. “In 1990, there was a lot of very negative press about Phoenix,” he recalls. The headlines were no more positive this time around; however, NorthMarq's Phoenix office saw it as a time of opportunity.

“In '07, we were faced with a choice: we could either hunker down and go negative, or we could get aggressive,” he says. “We cut our office overhead by two-thirds by moving, but we expanded in terms of looking for new talent.” The office also tapped into longstanding relationships with local life companies as well as Fannie Mae and Freddie Mac. That proactive approach paid off when the market turned upward again.

The recession hit Orlando hard on two fronts: tourism and construction, says Melissa Marcolini-Quinn, who runs NorthMarq's Central Florida operations as SVP and senior director. “We came to a virtual standstill,” Marcolini-Quinn tells GlobeSt.com. “From a financing standpoint, we were almost considered the pariah of the nation. I would call up a lender, and if you said the deal was anywhere in Florida, they didn't want to talk to you. It was sad, because even in the depths of the downturn, we had some submarkets and some assets that continued to perform very well. But nobody wanted to hear that story.”

It's fair to say that from that trough, the Orlando area has come back stronger than ever, Marcolini-Quinn agrees. “Our unemployment rate is below not only Florida, but the national rate as well,” with an uptick in tourism helping to drive the hiring.

But there's more than the hospitality sector seeing a strong recovery: construction and housing have come back, as well. “Our single-family homes are coming back, as well as our commercial construction; you see activity all over the place,” says Marcolini-Quinn. That single-family development in particular has rebounded “tells you how strong everything is getting.”

That being said, Marcolini-Quinn is also “very bullish” on multifamily and doesn't share the concerns some have over a bubble starting to form in the sector. For one thing, the area's population is growing again; for another, many participants in that growing population and job market don't see the worth in buying a home. Further, obtaining financing for a single-family home is still an issue, and Marcolini-Quinn anticipates that it will remain one for the foreseeable future.

A particular hot spot for multifamily development in the market is Lake Nona, which is also the nexus of a growing healthcare and life sciences sector. “That area is just blowing up,” says Marcolini-Quinn. “And you're talking about high-paying jobs, not low-level jobs. That is spurring growth in that area that will be long-term, steady growth.”

The development of the SunRail commuter rail line through Central Florida, scheduled to begin service in 2014, is also spurring commercial and multifamily activity. Orlando's city government just approved the construction of a soccer stadium downtown, bringing the city its second major-league sports franchise after the Orlando Magic basketball team.

Then there's the University of Central Florida, now the nation's second largest with 53,000 students. NorthMarq, for example, originated construction of a 600-bed class A student housing project at UCF last year. Overall, the Orlando office in 2012 saw a 109% increase in loan production Y-O-Y, and a 444% rise since the depths of the downturn.

“It's exciting, to be honest,” Marcolini-Quinn says. “Having seen what happened in the downturn, when everything came to a total, screeching halt, to see this tremendous rebound is almost like a rebirth.”